February 27, 2020

Atlassian Stock Pops, Leader In Digital Transformation Has Pricing Power - Investor's Business Daily

By REINHARDT KRAUSE January 24, 2020 11 0
Atlassian Corp Plc Cl A
Atlassian Corp Plc Cl A


IBD Stock Analysis
  • Stock gaps up past 140.59 buy point out of a disguised cup with handle
  • With the gap-up in Friday's action, investors may look for new base
  • Its 37% jump in Q2 revenue is its sixth-straight in the high 30% range

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Emerging Pattern

Cup with Handle

Cup with Handle

A positive chart pattern named such because it resembles the outline of a coffee cup with a handle. The pattern can last from seven weeks to as long as a year, but most are three to six months.

* Not real-time data. All data shown was captured at1:39PM EST on01/24/2020.

IBD Stock of the DayAtlassian (TEAM) is one of Wall Street's darling "digital transformation" software stocks. Atlassian stock popped Friday, jumping into a newly minted buy zone, after fiscal second-quarter earnings and revenue topped analyst estimates.


Atlassian's revenue and big billings beat came from customers renewing contracts in the December quarter to avoid price hikes. Atlassian's pricing power — its ability to increase fees annually on software developers — has fueled consistent top-line growth.

For the period, revenue rose 37% to $408.7 million, marking the sixth-straight quarter of revenue growth in the high 30% range.

"A $1.6 billion revenue company (on fiscal 2020 estimates) reported 30%-plus organic revenue growth and delivered nearly 50% free cash flow margins. That is exceptional execution by any measure," Canaccord Genuity analyst Richard Davis said in a report to clients.

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Demand for Atlassian's tools has boomed as corporate information technology departments spend heavily on digital transformation projects.

Atlassian Stock: A Leader In DevOps Software Market

Software developers at many U.S. companies are under the gun to build and deploy applications faster and more reliably. These apps may be headed to company websites, mobile phones or cloud computing platforms.

Atlassian's project management and bug-tracking tools make it easier for software developers to build, test and release software faster. Competition has been growing in the so-called DevOps software market.

Atlassian stock on Friday jumped on the market open, surging nearly 14% to 150.71 in early trading. It was up 9.7% to 145.54 in afternoon trading on the stock market today as the Nasdaq composite fell.

With Friday's gain, Atlassian stock rose above a 140.59 entry point coming out of a cup-with-handle formation. Atlassian stock spent a long time on the IBD 50 roster of growth stocks in 2018 and the first half of 2019, hitting an all-time high of 149.80 on July 26 last year.

Amid worries over the lofty valuations of software stocks, shares in Atlassian swooned after its fiscal first-quarter earnings beat in October was smaller than some investors expected. The new 140.59 entry point formed after a nearly six-month consolidation.

When a stock gaps up like Atlassian did, it is possible that a new flat base will form as the big gains consolidate. Keep in mind, the latest base was a riskier late-stage pattern.

Atlassian Company President Leaving

Atlassian's earnings beat shows it can thrive as it becomes a bigger company, Canaccord's Davis said.

Said Davis: "Of course, no silver lining arrives without a cloud, so for Atlassian, we got the summer retirement of the firm's president, the caveat that this quarter's revenue and margins were boosted by expedited purchases in front of a price increase, and lower than forecast expenses because R&D hiring lagged."

Atlassian announced late Thursday that President Jay Simons will leave in July. Simons led its distribution and sales strategy.

One key to Atlassian stock and its profitability is its small direct sales force. In addition, Atlassian markets products through paid search online. It also hosts customer events that foster a strong user community.

Cloud Subscription Revenue A Bright Spot

Founded in Sydney in 2002, Atlassian found an early niche selling its Jira-branded project-tracking tools to product development teams. The company still gets two-thirds of revenue from Jira tools and its Confluence document-collaboration software.

Its older source of revenue, on-site software licenses, is growing at a slower pace. However, Atlassian sells more subscription-based services via the internet. That provides recurring sales for the company, something it doesn't get from license fees.

Further, during the second quarter, subscription revenue rose 50% to $229 million.

"Sustained revenue growth and steadily improving margins remains the recipe for durable mid-30s free cash flow growth," Atlassian stock analyst Keith Weiss of Morgan Stanley said in a note to clients Friday.

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.


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